Businesses in the UAE embarked on their VAT journey on January 1, 2018. In the past two years, the Federal Tax Authority (FTA) has published several guidelines, public and private clarifications, conducted sessions and tax clinics to spread enough awareness of the VAT Law.
The VAT is a self-assessment tax that requires the taxpayer to compute its tax liability and file returns. Therefore, the entire onus to determine taxability of any transaction or recovery of VAT is on the taxpayer. Upon identification of an error or omission in the past VAT filings resulting in tax payable of more than Dh10,000, the VAT legislation lays down the mechanism to rectify those errors and notify the same to FTA through Voluntary Disclosure (VD) scheme.
Many businesses in the UAE have already filed VDs, either based on their internal findings or hiring external consultants to conduct VAT health checks or pursuant to a FTA clarification. In our experience, common errors resulting in filing of VDs include (a) VAT recovery on medical insurance for employee dependents and Emirati employees (b) Non-fulfilment of conditions for zero-rated exports (c) VAT on transitional contracts (d) Applicability of profit margin scheme (e) Recovery of VAT on supplier invoices beyond two tax periods (f) Errors in VAT calculations and errors in interpretation of the law resulting in incorrect tax positions.
Though, the right approach is to file VDs and come clean in the eyes of the FTA, many taxpayers are still apprehensive to undertake corrective steps through VD or seek clarifications on contentious issues. This is either due to the quantum of penalties that could potentially be imposed (up to 300 per cent) or simply due to the fear of being noticed by FTA leading to an audit or assessment.
The UAE VAT law and allied legislations provide a three-level dispute resolution mechanism allowing the taxpayers a transparent and fair redressal of their tax disputes. Any adverse decision, due to an unfavourable clarification or penalties auto-populated on filing of VD or otherwise, entitles the taxpayers to submit an application for reconsideration before the FTA and then followed by filing an objection with the Tax Disputes Resolution Committee (TDRC). If still unsuccessful, there's a right to appeal with the Federal Court of Appeal.
In our experience penalties have been waived by the FTA giving relief to the genuine taxpayers, albeit sparsely and generally where the amounts are meagre. The waiver is generally applied where the errors are basic or on account of a system error, and if businesses undertook suo moto corrective steps and not subsequent to a tax assessment. Where the amounts are large, generally the assessments have been unfavourable and taxpayer's appeals have reached up to TDRC.
VAT litigation in the UAE is still in initial stage. Thus, it is critical that adequate care is taken while drafting the appeals filed either as application for reconsideration or objection with the TDRC or an appeal with the Federal Court. The appeals, in addition to capturing facts in detail should be able to very clearly draw the attention of the judiciary on the relevant legal aspects.
Where the taxpayer intends to challenge a penalty, the appeal should clearly bring out the reasons for default or delay in payment of tax. Cases involving a change in tax positions resulting from a subsequent public or private clarification issued by FTA or genuine errors identified later should be clearly drafted with a specific mention of absence of any wrong intention or mensrea.
The opportunity for a personal hearing before the judiciary members could be limited, and thus, appropriate professional advice should be taken for drafting the arguments as they will carry considerable weight in deciding the outcome of the matter. Businesses should also ensure that the appeals are filed within the prescribed time period (generally 20 business days). Practically, FTA/TDRC do reject applications which are time-barred i.e. filed late. Also, before filing an objection with the TDRC, tax and penalty have to be first paid, else the objection shall be rejected by the TDRC.
The appeals (at all levels) have to be filed in Arabic and in our experience, translation of English legal jargons to Arabic sometimes poses a challenge. Suitable professional help should be taken to ensure the application maintains its legal force.
Since VAT litigation is new, there are not enough jurisprudence available to rely on. In a recent landmark ruling that was represented by WTS Dhruva Consultants, the Dubai TDRC granted substantial relief with the reduction in VD penalties. The favourable ruling was passed based on the grounds that the taxpayer acted in good faith and undertook corrective steps by filing VDs immediately from the date of realizing the error. Reliance was also placed on UAE Federal Supreme Court in civil matters and global jurisprudences to indicate that unintentional errors are not punishable, especially if it has occurred in good faith.
It appears that the judiciary will favourably look at genuine cases of tax defaults, albeit later being rectified through VDs. This should set a precedent for other businesses rectify the past errors and omissions voluntarily.
Pragmatic solutions to tax disputes are clearly evolving, and one should keenly watch out for further developments.
Nimish Goel and Geet Shah are partner and principal, respectively, at WTS Dhruva Consultants. Views expressed are their own and do not reflect the newspaper's policy.